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Standard & Poor’s Global Ratings late on Friday night affirmed South Africa’s
credit ratings, keeping the country’s rand debt at "BB+", the first
notch of sub investment grade, and SA’s foreign-currency debt at
"BB", the second grade of junk status.

S&P, one of
the three largest international ratings agencies acknowledged the reforms being
undertaken by President Cyril Ramaphosa’s administration but flagged
“considerable” challenges to improving the country’s financial position.

Fin24 took a
look at the reasons behind S&P’s cautious approach to “Ramaphoria”.

Weak per
capita growth

“South Africa's
economic growth, on a per capita basis, is below that of emerging market
peers,” according to S&P.

S&P
forecasts stronger economic growth, on average of at least 2% over 2018-2021
but this will translate into below 1% growth per capita (average per person).

This puts SA’s
per capita economic growth second lowest amongst 20 emerging market economies
with only Qatar expected to grow slower than SA.

Socio-economic
challenges

S&P
believes that SA faces “significant challenges” due to high levels of poverty,
unemployment, and economic inequality, mostly along racial lines.

In light of
this, according to the ratings agency, a political debate took place over land
which resulted in a parliamentary committee being established to assess whether
the constitution should be changed to allow for expropriation without
compensation.

S&P said
that it is still too early to tell how the process will unfold, but they expect
the rule of land to be maintained and changes to the country’s land policy will
not hamper investment.

Weak fiscal
position

S&P
expressed concern about the state of SA’s public finances but acknowledged that
government is taking steps to reduce the fiscal deficit and the pace of debt
accumulation.

The ratings
agency highlighted the measures in the February budget speech which included
raising the value-added tax (VAT) rate to 15% from 14% and making some
reductions in expenditure items such as infrastructure grants to schools and
municipalities.

“We estimate
that the annual change in net general government debt will average 4.5% of GDP
per year over 2018-2021. As a consequence, we project that net general
government debt to GDP will increase to around 52% net of liquid assets by the
fiscal year ending March 2021,” S&P noted.

According to
the ratings agency, debt-servicing costs will remain close to 12% of revenues
and risks still remain to public finances in the form of higher public sector
wage agreements than budgeted, and potential unbudgeted support to state-owned
enterprises (SOEs).

Economy
vulnerable to global investor sentiment

The majority of
South Africa's government debt is in rands, with only 10% in foreign currency
and according to S&P, this shields public debt from exchange rate shocks.

However, 40% of
government’s rand denominated debt is held by foreigners or international
institutions and S&P points out that while this can lower the government’s
cost of debt, it makes the economy vulnerable to global investor sentiment.

Both SA’s rand
denominated debt and foreign currency debt are rated as sub-investment grade or
junk status, by S&P.

Contingent
liabilities

S&P views
Treasury’s guarantees to SOEs and its contingent liabilities as “sizable”.

“This reflects
the increased risk that nonfinancial public enterprises (NFPEs) could require
further extraordinary government support than currently provisioned.”

S&P is also
concerned that reforms to improve parastatals' financial positions might not be
comprehensive or undertaken soon enough.

The ratings
agency estimates that overall public sector debt (including national, municipal
and SOEs) will stand at 70% of GDP in 2018.